Driving Forces for a Record Year in DST Equity Investment
October 12, 2021
A few months ago, we projected a potential investment of equity into Delaware Statutory Trust (DSTs) in 2021 could reach $5 Billion. This would be either in cash direct investments or 1031 tax deferred exchanges. As a member of the Alternative & Direct Investment Securities Association (ADISA) we attended the annual conference recently. Besides the energy created being the first post COVID conference there was also excitement about the health of the alternative investment industry. Most of the excitement was focused on the amount of equity being directed into the Delaware Statutory Trust (DST) alternative. All the news seems to be very positive on all asset classes with very few exceptions. Our projections may have been optimistic at that time but now seems to be conservative. There are strong opinions that the industry could reach $6 Billion in equity.
The big picture. In 2020 (the year of COVID) the amount of equity invested in the DST asset was $3.2B for the entire year. This was down slightly from 2019 record year of $3.5 Billion. As of September 15, 2021, there has been $4.1 Billion invested as reported by the various sponsors.
The number of sponsors of DST offerings is worth noting. Currently there are 39 sponsors. Over the last 4 years that number has remained stable. The number of sponsors has declined from the heydays of 2006 where there were 71 sponsors. 2012 saw the lowest number of sponsors were only 8 were offering products. During the great recession there was pressures on all aspects of the commercial securitize markets as well as commercial real estate in general. Currently there is a healthy mix of experienced sponsors offerings a variety of investment opportunities. There are a few new sponsors moving into the DST space. However, many new sponsors have already been in operations for years in other alternative real estate offerings and now are adding DST into their other investment portfolio options.
The asset mix has stayed consistent with multifamily leading. Of the $4.1 B in equity invested so far this year, $2 B has been in Multifamily. In addition, when you add the other sub sectors of residential (Manufactured Housing $173 M, Senior Housing $115 M and Student Housing $63 M) this accounts for $2.4 Billion. Industrial continues to perform extremely well especially with the limited number of properties with $525 Million. Self-storage continues to perform well with $304M Office recorded $210 Million and medical office $127 Million. There is about $50M in a variety of other offerings. The only asset class reporting limited interest would be hospitality.
Geographically, Texas had led the offerings with 39 offerings, Florida 28, GA 24, and to my surprise Illinois with 22. There are several states including California that have double digit offerings. Offerings that are under the $30M equity amount are on the market for about a month. When the offerings are over the $100M naturally these will be available for a longer period which provides investor with more time for placing an investment in a specific asset.
The number of current offerings is also a somewhat fluid and illusive number. As of September 15, 2021, there were 48 active offerings and 135 closed offerings. The other illusive number is the days on market. While the average days on market is 126 (2020 was 200 days) the medium is 77 days (2020 164 days). What this indicates may be a few trends: DST that are going full cycle have roll overs that are funding new DSTs; investors are positioning their direct cash investments or 1031 replacement quicker. While this may provide basic numbers the small the offering naturally the fewer days on market. Also, all cash DST are in limited supply. Our Landscape Summary on DSTnews.org provides weekly updates to the numbers of offerings. Behind the numbers there are many changes on a weekly basis. $300,000,000 to $500,000,000 on may come on and off the market in a few weeks period of time but the overall numbers may not reflect all the activity on a daily basis.
There have been pressures on projected distribution on all asset classes, especially with the multifamily asset class. While the reported overall average distribution is 4.87% most of the multi family assets are projecting returns in the 4% range and some in the high 3% range. There are many other facets to the multifamily analysis that cannot be covered in this short review. There are a lot of investment dollars chasing multifamily as well as single family rental asset seller are able to obtain greater acquisition cost. Multi family has and appears to continue to be a stable asset class creating a consistent cash flow.
The average equity raised in 2021 has been $114 M per week. This is up from $76 M per week in quarter 4 of 2020. The market demand is very strong, and supply has caught up with the expectation of lower returns. Full cycle DST activities are significant and anticipated to be closer to $1.5 Billion this year. This creates confidence in the product offering and investor satisfaction. Investor that are selling are reinvesting in the same market condition as they are selling.
The last quarter of 2021 will demand financial advisors and representatives to be focused on sponsor equity current availability and what is about to be released to investors. We will continue to interface with the major sponsors and monitor opportunities for cash investors as well as 1031 tax deferred exchange investors.
DSTs are not for all investors. The acquisition of a DST is for accredited investors only. Contact your investment adviser for additional details on how a DST may be a solution to your 1031 Exchange and suited for your investment future. For more information on how to properly set up an IRC 1031 Tax Deferred Exchange or if you are an accredited investor and would like additional information on a DST contact Al DiNicola at 239-691-8098 or email adinicola@namcoa.com
DST 1031 consulting advisory services may be offered through: NAMCOA® – Naples Asset Management Company®, LLC 999 Vanderbilt Beach Rd, Suite 200 Naples, FL 34108. Direct: 239-691-8098
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